Encana, PetroChina take $2bn stab at joint venture

There was no indication of delays like the one faced by CNOOC in its eventually successful bid for oil producer Nexen.
Photo: Reuters

by
Jeffrey Jones

PetroChina will pay Encana $C2.2 billion ($2.12 billion) for a 49.9 per cent stake in a rich Alberta shale gas prospect owned by the Canadian company. It is the first big deal since Ottawa issued new guidelines for major energy investments by foreign state-owned enterprises.

Encana said the venture, with a non-controlling interest for PetroChina, allows the partners to bypass stringent reviews under the government's new restrictions. The government had no immediate comment. But there was no indication of delays like the one faced by CNOOC in its eventually successful bid for oil producer Nexen.

Encana announced the deal less than a week after Canada issued its new framework for approving takeovers of resource assets, particularly oil sands, by foreign state-owned companies. The government also approved the Nexen takeover and a bid for Progress Energy Resources by Malaysia's Petronas.

TIMING ‘UNBELIEVABLE’

"The timing of this deal is really quite unbelievable," said lawyer Richard Steinberg, head of Fasken Martineau's mergers & acquisitions practice group. "This is a step removed from the oil sands and so to the extent that this is not Canadian oil sands, it does seem to be in a less sensitive area and not directly in the bulls-eye." Steinberg noted that the deal appeared to tick all the boxes in the government's new rule book.

Under the deal, which follows a failed joint-venture attempt by the pair last year, a unit of PetroChina known as Phoenix Duvernay Gas will take the nearly-half interest in Encana's Duvernay play in west-central Alberta, estimated to contain 9 billion barrels of oil equivalent.

It had already paid $C1.18 billion and the other $C1 billion was payable over the next four years to help Encana pay for development, said Encana, Canada's largest natural gas producer. During the period, the partners will spend $C4 billion on drilling and processing facilities.

With the agreement, Encana makes good on a big part of a high-profile effort to attract partners to help pay for development of a host of prospects across North America. It is concentrating on those that feature natural gas that is high in liquid hydrocarbon content as a way to reduce its spending and protect its balance sheet. Such fuels are priced closer to crude oil than to dry gas, of which there is continent-wide glut that has driven down prices at times to decade lows.

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Encana chief executive Randy Eresman said in an interview: "It's largely an opportunity for us to explore, delineate and ultimately develop what we think is a huge resource that, on our own, we would likely not be able to bring to commercialisation as quickly as we can now with having a partner. "Our understanding is that it does not require any government approvals at all."

Encana shares rose 41 Canadian cents, or 2 per cent, to $C20.85 on the Toronto Stock Exchange. They are up about 12 per cent this year.

NEW FRAMEWORK

The government's new framework in effect bans enterprises controlled by foreign governments from taking control of more businesses in Canada's oil sands, but the government said it welcomed investment and joint ventures.

"We were waiting to find out if the rules would in any way impact our deal and basically what we think at this point is that the government has made it clear that it supports this kind of transaction – a non-controlling interest in a joint venture," Eresman said.

Encana and PetroChina tried to set up a $C5.4 billion joint venture on British Columbia gas assets last year, but the deal fell through over reported disagreements about asset value and development pace. "We never ever concluded that transaction, so there were a lot of discussion points that we never ultimately resolved," Eresman said.

A key difference between the agreements is that the failed one would have included Encana's producing and undeveloped assets, as well as processing equipment. Thursday's deal with PetroChina's new Phoenix unit was essentially the start of a new project, Eresman said.

Encana has spent the past couple of years attracting partners to other parts of its business and has sought more for such assets as the Tuscaloosa Marine Shale in Louisiana and Mississippi and Eaglebine Shale in Texas.

Bond rating agency DBRS said the new venture would strengthen Encana's cash position to $US3 billion ($2.85 billion) from $US2 billion at the end of September. DBRS expects proceeds from asset sales will keep funding large portions of the company's capital spending.

Encana has drilled nine wells on its 445,000 acres (180,100 hectares) of land in the Duvernay, where many companies have amassed large land positions through government land sales and takeovers. In October, Exxon Mobil agreed to spend $C2.6 billion to take over Celtic Exploration, which has extensive acreage in the region.

A study by the Alberta Energy Resources Conservation Board and Alberta Geological Survey said the Duvernay formation, which extends through much of central Alberta, contains 443 trillion cubic feet of total gas in place, 11.3 billion barrels of natural gas liquids and 61.7 billion barrels of oil, putting it on par with some of the continent's largest shale prospects.